24 October 2016 Nearly $40bn in Chinese acquisitions pushed back by west Premium

Most have fallen foul of concerns over competition and security issues, such as one takeover target’s proximity to a key military base, and has prompted some western governments to consider new regulatory procedures to probe Chinese deals.

That total, compiled by boutique investment bank Grisons Peak, does not include proposed Chinese takeovers of Swiss agribusiness Syngenta and German semiconductor company Aixtron for $44bn and €670m, respectively. Both faced problems on Monday following reviews by EU and German authorities.

Despite the concerns, Chinese acquirers continue to unveil fresh deals. HNA Group, an aviation and leisure conglomerate, announced on Monday it would buy a 25 per cent stake in hotelier Hilton Worldwide from Blackstone for $6.5bn while financial holdings conglomerate China Oceanwide said it had agreed a $2.7bn purchase of US insurer Genworth Financial.

But there are signs the increasing scrutiny is becoming a brake on the surge in Chinese outbound takeovers. Announced Chinese M&A deals in the third quarter of this year amounted to $46.1bn, down from $49.4bn in the second quarter and a quarterly record of $95.6bn in the first, according to data from Grisons Peak.

Last week it emerged that Blackstone, the private equity group, had dropped plans to sell San Diego’s landmark Hotel del Coronado, which is located near a sensitive naval base, for about $1bn to China’s Anbang Insurance due to US national security concerns.

A total of 11 large acquisitions have been dropped by Chinese suitors since July last year, mainly as a result of tightening official examinations by authorities in the US, Australia and elsewhere, according to Grisons Peak.

The total value of foiled deals comes to $38.9bn, the data show, or 14 per cent of all deals announced over the past 16 months. But the proportion of failures would surge if the Syngenta, Aixtron and other approaches were also blocked.

Shares in Syngenta dropped sharply Monday after its proposed acquirer, ChemChina, failed to offer any concessions to an EU competition inquiry ahead of a deadline last week. The proposed Syngenta deal would be the largest overseas acquisition by a Chinese company.

And Berlin’s economics ministry withdrew a certificate saying it had no objection to the sale of Aixtron to a group of Chinese investors and said it was reopening a review, Aixtron said on Monday.

Popular opposition to the takeover by Chinese companies of leading German industrial corporations is hardening. Martin Fischer, analyst at business consultancy Alaco, said an “emerging push for protectionism” in Germany is being fuelled by a flood of Chinese investments, with particular vigilance reserved for China’s state-owned enterprises.

He noted that the Social Democrats, junior partners in Germany’s ruling coalition, had drafted a proposal that would give EU governments more power to prevent takeovers by foreign state-backed investors. Announced Chinese investments in Germany rose to a record $10.8bn in the first half of this year, including deals to acquire 37 German companies, according to EY, a consultancy.

Theresa May, the UK prime minister, is planning to introduce a new system to vet foreign investment into Britain. Mrs May wants her government to be able to intervene in an “orderly and structured” way over sensitive foreign investment cases and is studying regimes used in the US and Australia.

The extent to which the slowing number of outward M&A deals has been prompted directly by toughening scrutiny abroad is not clear. But the tally is mounting.

In August, Australia blocked China’s state-owned State Grid Corp and Cheung Kong Infrastructure Holdings, a Hong Kong company, from taking a $7.6bn controlling stake in the country’s biggest electricity distribution network on national security grounds. Within minutes of the announcement, Shen Danyang, a spokesman for China’s commerce ministry, said the ruling was protectionist and would “seriously” reduce the appetite of Chinese companies to invest in Australia.

In the case of several planned acquisitions in the US, Chinese companies have terminated bids after learning the Committee on Foreign Investment in the United States, the national security review board, decided to launch a review.

Unisplendour, a subsidiary of state-owned Tsinghua Holdings, terminated its $3.8bn bid for a stake in Western Digital, a US data storage company, after it became clear early this year that CFIUS would conduct a review.

CFIUS’ opposition to a plan by Philips, a Dutch technology company, to sell off its US-based Lumileds lighting division also resulted in the termination of the $3.3bn deal.

Even if [political pressure] fades after the US election, China’s global investment will post very large numbers in 2016 that will make host countries wary about another wave in 2017

Some other deals, including a $14bn bid by Anbang Insurance for the US’s Starwood Hotels and Resorts, were cancelled by the Chinese side without any apparent intervention from CFIUS. Anbang has given little explanation for its abrupt termination of the bid, but analysts said an aversion to public scrutiny combined with opposition from official bodies in Beijing may have been factors.

Henry Tillman, chief executive of Grisons Peak, said he expected the slowdown in outward Chinese investment would persist. “We expect continued declines in M&A volumes over the next few quarters due to uncertainties in financial markets as well as uncertainties related to elections in the US, Germany and France — as well as Brexit — all within the next year,” Mr Tillman said.

However, China’s problems in its overseas commercial dealings are by no means limited to deals thwarted by regulatory attention. According to data compiled by the American Enterprise Institute and the Heritage Foundation, two US think-tanks, the value of total “troubled” transactions by Chinese companies overseas rose to $45.2bn in the 18 months to mid-2016, up from $36.3bn in the preceding 18 months.

This data series includes not only overseas investments but also construction projects undertaken by Chinese companies abroad. The “troubled” classification is defined as deals and projects beset by cost overruns, lengthy delays and cancellations.

Derek Scissors, China expert at the AEI, said the atmosphere towards Chinese outward investment was turning more wary.

“There is political pressure in the US to examine Chinese investment in entertainment and technology more closely,” Mr Scissors said. “Even if this fades after the US election, China’s global investment will post very large numbers in 2016 that will make host countries wary about another wave in 2017.”